Work in process: Difference between revisions

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{{Short description|Partially finished goods waiting for completion and eventual sale or value of these items}}

{{redirect|Work in progress}}

'''Work in process''' or '''work-in-process''', ('''WIP'''),<ref name="yourdictionary">{{cite web|url=http://business.yourdictionary.com/work-in-process|title=Work-in-process dictionary definition &#124; work-in-process defined|publisher=business.yourdictionary.com|access-date=2014-07-12}}</ref><ref name="ventureline">{{cite web|url=http://www.ventureline.com/accounting-glossary/w/work-in-process-definition/|title=WORK IN PROCESS DEFINITION|publisher=ventureline.com|access-date=2014-07-12}}</ref><ref name="businessdictionary">{{cite web|url=http://www.businessdictionary.com/definition/work-in-process.html|title=What is work in process? definition and meaning|publisher=businessdictionary.com|access-date=2014-07-12|archive-date=2019-12-05|archive-url=https://web.archive.org/web/20191205005123/http://www.businessdictionary.com/definition/work-in-process.html|url-status=dead}}</ref><ref name="thefreedictionary">{{cite web|url=http://financial-dictionary.thefreedictionary.com/work+in+process|title=Work in Process financial definition of Work in Process|publisher=financial-dictionary.thefreedictionary.com|access-date=2014-07-12}}</ref> '''work in progress''' ('''WIP'''),<ref name="collinsdictionary">{{cite web|url=http://www.collinsdictionary.com/dictionary/english/workinprogress|title=Collins English Dictionary &#124; Always Free Online|publisher=collinsdictionary.com|access-date=2014-07-12}}</ref><ref name="investopedia">{{cite web|url=http://www.investopedia.com/terms/w/workinprogress.asp|title=Work In Progress (WIP) Definition &#124; Investopedia|publisher=investopedia.com|access-date=2014-07-12}}</ref><ref name="ventureline2">{{cite web|title=What Is Work-In-Progress (WIP)? {{!}} Finance Strategists|url=https://www.financestrategists.com/terms/work-in-progress/|access-date=2020-11-11|website=Finance Strategists|publisher=financestrategists.com}}</ref> '''goods in process''',<ref name="yourdictionary"/> or '''in-process inventory''' arerefers to a company's partially finished goods waiting for completion and eventual sale, or the value of these items.<ref name="tuition">{{cite web|url=http://www.tuition.com.hk/dictionary/w.htm|title=W - Wage to WTO (World Trade Organisation) - Dictionary|publisher=tuition.com.hk|access-date=2014-07-12}}</ref> TheseThe itemsterm areis eitherused justin being[[supply fabricatedchain ormanagement]], waitingand WIP is a key input for furthercalculating processinginventory inon a queuecompany's balance sheet. In [[lean thinking]], inappropriate processing or aexcessive bufferprocessing storage.of Thegoods termor work in process, "doing more than is usednecessary", inis productionseen andas one of the seven wastes (Japanese term: ''[[supplyMuda chain(Japanese managementterm)|muda]]'') which do not add value to a product.<ref>EKU Online, {{cite web|title=The Seven Wastes of Lean Manufacturing|url=https://safetymanagement.eku.edu/blog/the-seven-wastes-of-lean-manufacturing/|archive-url=https://web.archive.org/web/20230326031300/https://safetymanagement.eku.edu/blog/the-seven-wastes-of-lean-manufacturing/|archive-date=2023-03-26|url-status=dead}}, ''Eastern Kentucky University'', accessed 6 March 2023</ref><ref>McDonald, M. P., [https://blogs.gartner.com/mark-mcdonald/2009/10/09/inappropriate-processing-muda-matters-in-it/ Inappropriate Processing: Muda matters in IT], ''Gartner'', published 9 October 2009, accessed 7 March 2023</ref>

{{refimprove|date=January 2013}}

'''Work in process''' ('''WIP'''),<ref name="yourdictionary">{{cite web|url=http://business.yourdictionary.com/work-in-process|title=Work-in-process dictionary definition &#124; work-in-process defined|publisher=business.yourdictionary.com|access-date=2014-07-12}}</ref><ref name="ventureline">{{cite web|url=http://www.ventureline.com/accounting-glossary/w/work-in-process-definition/|title=WORK IN PROCESS DEFINITION|publisher=ventureline.com|access-date=2014-07-12}}</ref><ref name="businessdictionary">{{cite web|url=http://www.businessdictionary.com/definition/work-in-process.html|title=What is work in process? definition and meaning|publisher=businessdictionary.com|access-date=2014-07-12}}</ref><ref name="thefreedictionary">{{cite web|url=http://financial-dictionary.thefreedictionary.com/work+in+process|title=Work in Process financial definition of Work in Process|publisher=financial-dictionary.thefreedictionary.com|access-date=2014-07-12}}</ref> '''work in progress''' ('''WIP'''),<ref name="collinsdictionary">{{cite web|url=http://www.collinsdictionary.com/dictionary/english/workinprogress|title=Collins English Dictionary &#124; Always Free Online|publisher=collinsdictionary.com|access-date=2014-07-12}}</ref><ref name="investopedia">{{cite web|url=http://www.investopedia.com/terms/w/workinprogress.asp|title=Work In Progress (WIP) Definition &#124; Investopedia|publisher=investopedia.com|access-date=2014-07-12}}</ref><ref name="ventureline2">{{cite web|title=What Is Work-In-Progress (WIP)? {{!}} Finance Strategists|url=https://www.financestrategists.com/terms/work-in-progress/|access-date=2020-11-11|website=Finance Strategists|publisher=financestrategists.com}}</ref> '''goods in process''',<ref name="yourdictionary"/> or '''in-process inventory''' are a company's partially finished goods waiting for completion and eventual sale or the value of these items.<ref name="tuition">{{cite web|url=http://www.tuition.com.hk/dictionary/w.htm|title=W - Wage to WTO (World Trade Organisation) - Dictionary|publisher=tuition.com.hk|access-date=2014-07-12}}</ref> These items are either just being fabricated or waiting for further processing in a queue or a buffer storage. The term is used in production and [[supply chain management]].

== WIP inventory in supply chain management ==

Optimal production management aims to minimize work in process. Work in process requires storage space, represents bound capital not available for investment and carries an inherent risk of earlier expiration of shelf life of the products. A queue leading to a production step shows that the step is well buffered for shortage in supplies from preceding steps, but may also indicate insufficient capacity to process the output from these preceding steps.

WIP inventory calculations can help a company assess their supply chain health and guide in supply chain planning.<ref name=":0">{{Cite web |date=2021-08-25 |title=What is Work in Process (WIP) Inventory & How to Calculate It |url=https://ware2go.co/work-in-process-inventory/ |access-date=2022-07-13 |website=Ware2Go |language=en-US}}</ref> In most cases, it is ideal to have low WIP inventory levels,<ref name=":0" /> and companies that manage their inventory level efficiently tend to have lower costs.<ref name=":1">{{Cite web |date=2019-04-23 |title=What is Work in Process (WIP) in logistics? - SCM EDU |url=https://scmedu.org/workinprocess_wip_/ |access-date=2022-07-13 |language=en-US}}</ref> Managing WIP inventory requires coordination between several functions within a company, as well as with suppliers and customers.<ref name=":1" /> Higher WIP inventory levels are advantageous in that they can support a surge in demand, as well as improve cycle time since there is more material in production. However, this can also increase storage costs and obsolescence risk, as well as lead to waste if demand is lower than expected.<ref>{{Cite web |date=2020-10-26 |title=WIP Inventory {{!}} Advantages and Disadvantages of WIP Inventory |url=https://www.educba.com/wip-inventory/ |access-date=2022-07-13 |website=EDUCBA |language=en-US}}</ref> To mitigate these risks, companies are increasingly turning to demand forecasting software.<ref>{{Cite news |last=NetSuite.com |title=Manufacturing Financial Statements Explained |url=https://www.netsuite.com/portal/resource/articles/accounting/manufacturing-financial-statements.shtml |archive-url=http://web.archive.org/web/20240621232627/https://www.netsuite.com/portal/resource/articles/accounting/manufacturing-financial-statements.shtml |archive-date=2024-06-21 |access-date=2025-02-08 |work=Oracle NetSuite |language=en}}</ref> These tools analyze historical data, market trends, and customer behavior to predict future demand with greater accuracy. This allows companies to optimize WIP levels, ensuring they have enough material to meet anticipated demand without carrying excessive inventory that could become obsolete.<ref name="Demand Forecasting Software">{{cite web |last1=Dekhne |first1=Ashutosh |last2=Lange |first2=Tim |last3=Magnus |first3=Karl-Hendrik |last4=Scheringer |first4=Isabell |last5=Vincken |first5=Simon |title=Retail and Consumer Packaged Goods:Better service with connected inventory |url=https://www.mckinsey.com/~/media/McKinsey/Industries/Retail/Our%20Insights/Better%20service%20with%20connected%20inventory/Better-service-with-connected-inventory.pdf |website=McKinsey.com |publisher=McKinsey & Company}}</ref>

== WIP ininventory constructionin projectsaccounting ==

WIP inventory refers to goods that are in production and not yet a finished good.<ref>{{Cite web |title=What Work-in-Progress Really Means |url=https://www.investopedia.com/terms/w/workinprogress.asp |access-date=2022-07-13 |website=Investopedia |language=en}}</ref> On the balance sheet, WIP inventory is aggregated into the inventory line under current assets along with raw materials and finished goods.<ref>{{Cite web |first=Jeff|last=Schmidt|title=Inventory |url=https://corporatefinanceinstitute.com/resources/knowledge/accounting/inventory/ |access-date=2023-03-07 |website=Corporate Finance Institute |language=en-US}}</ref>

To calculate WIP inventory at the end of an accounting period, the following 3 figures are required: beginning WIP inventory, production costs, and finished goods. Beginning WIP inventory is the WIP inventory figure from the previous accounting period. Production costs includes all costs associated with manufacturing a product, such as raw materials, labor, and overhead costs. Finished goods is the total value of goods ready for sale in the current accounting period. The formula for calculating WIP inventory is as follows: beginning WIP inventory + production costs – finished goods.<ref name=":0" />

Work-In-Process in construction accounting identifies the value of construction projects which are currently being worked on by the construction firm. To properly account for each project, four values are needed for each project at the end of any given month (or period):

# the Sales Price (excluding sales tax) for the project,

# the total Cost Estimate for the project,

# the Costs-To-Date,

# the Billed-To-Date.

By taking the Costs-To-Date divided by the Cost Estimate, the "percentage complete" for the project is calculated. For example:

:* Assume a project is estimated to cost $70,000 by the time the work is complete

:* Assume at the end of December, $35,000 has been spent to date for the project

:* $35,000 divided by $70,000 is 50%, therefore, the project can be considered 50% complete at December 31.

Calculation of the Percentage complete is a valuable tool in determining how much the client should be billed - it is important that Billings, and even collection of these billings, are greater than the costs expended to do the work. This ensures that the client is directly funding the construction work, and that the contracting firm minimizes borrowing on behalf of the client. Using the example above, suppose the following:

:* the Sales Price of the project is $100,000

:* $100,000 times 50% (the level of completion) = $50,000

Therefore, for the period ending December 31, the client should be invoiced ''at least'' $50,000 to properly fund the work.

==Tax treatment==